PEOPLE who purchased properties in Cyprus financed by Cypriot banks were shocked to receive tax demands from HM Revenue & Customs for interest earned on their escrow accounts.
Cypriot banks have been using this peculiar method of releasing funds to property developers during the various stages of construction by placing the total amount of the loan in a holding account (called an escrow account) pending submission of Architect’s Certificates by the developer. They argue that the lender is fully compensated for the excess interest they pay on the loan by receiving the equivalent interest on the escrow account.
But this is not the end of the story. The bank in Cyprus then notifies HMRC under the European Union Savings Directive (EUSD) that income has been earned by the borrower on the escrow account. HMRC then demand payment of tax on this interest from the borrowers. The Revenue often goes back years to well before the EU Directive came in force and sometimes open a full investigation into the financial affairs of these individuals. The tax bill can be anything from a few hundred to several thousand pounds. These are people who purchased a property in Cyprus anticipating low interest, high rental and high resale values and instead they face up to 40% appreciation in foreign currency loans, high interest, negligible rental income and a drop of up to 70% in property values. The last thing they need is for the tax man to turn up demanding tax on interest they did not earn.
“I suppose we have to thank the banks in Cyprus for their diligence,” said George Kounis, Consultant with Maxwell Alves, Solicitors in the City of London. “I only wish that they stuck to the rules in all other matters.”
Maxwell Alves, who often take the role of campaigning lawyers and have been heavily involved in negotiations with Cypriot banks on behalf of clients, have now written to HM Revenue & Customs requesting a review of the application of the rules and tax refunds to the thousands of borrowers who have been caught by this peculiar internal procedure applied by Cypriot banks. They have also written to Bill Cash MP who is leading an all-party group of MPs on the Cyprus Property mis-selling scandal to intervene.
“Strictly speaking, HMRC may be applying the rules correctly but they are missing the point,” explains George Kounis. “The simple way of doing it, would have been for the bank to give an undertaking to the developer and add the stage payments to the loan as and when papers were submitted. Even if they chose to do it through an escrow account, the account should have been a non-interest bearing account and the interest earned should be credited to the loan directly which would not give rise to an EUSD declaration.”
It normally takes 4-6 weeks to get a response from HMRC, probably longer when more complicated issues are raised. Maxwell Alves are hoping that with the possible intervention of the newly-formed all-party group of MPs, sense will prevail and that HMRC will refund the tax paid and will stop pursuing these borrowers in future.
“Before the all-party group start sorting out issues in Cyprus, here is an issue that they can sort-out at home,” stated George Kounis.